A poison pill, also known as a shareholder rights plan, is a strategy a company might use to prevent a hostile takeover. Poison pills are designed to make a company’s stock less attractive to a would-be buyer, often by making it more expensive. One common example of a poison pill using stock is a “flip-in” in which current shareholders are allowed to purchase additional shares at a discount. This makes it harder for an acquirer to buy in and take over. A variant of this strategy is giving current shareholders preferred shares that convert into a large quantity of common shares if the takeover occurs. A “flip-over” is a poison pill that makes it easier for current shareholders to buy stock in the acquiring company should a merger take place, thereby diluting the acquiring company’s equity.
Poison pills can also take the form of management incentives such as golden parachutes, or staggering elections of board of directors, both of which make it harder for the acquiring company to make changes. Poison pills are controversial since they can increase costs for the company if they are actually implemented rather than simply threatened. Some economists also frown on poison pills since they prevent acquisitions that might be favorable to the market as a whole.
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